SEC Inspector General Releases Report Regarding the Commission's Destruction of Documents From Pre-Investigation Inquiries
On Tuesday, November 1, 2011, the SEC's Inspector General ("Inspector General or "OIG") released its report regarding the investigation into the SEC's policy of destroying documents gathered in pre-investigation inquiries known as Matters Under Inquiry ("MUI"), as well as statements made by the Commission to the National Archives and Records Administration ("NARA") regarding that policy. The Inspector General found that the SEC had a policy in place for nearly 30 years which called for the destruction of such documents and that certain documents that should have been preserved were destroyed. The Inspector General also found that, when asked about NARA about the destruction of documents, the SEC did not disclose the existence of the policy and stated it did not know if such documents had been destroyed. The Inspector General made a series of recommendations for the SEC to address these issues.
The Inspector General commenced its investigation on July 15, 2011 after receiving a letter from Gary Aguirre, counsel for Darcy Flynn, regarding the alleged improper destruction of documents. Mr. Flynn subsequently contacted Senator Grassley, who asked SEC Chairman Schapiro about the allegations, as discussed here.
The Inspector General's Report describes the SEC's policies regarding MUIs, which are were pre-investigation inquiries (distinct from formal investigations, MUIs were "opened to collect and analyze information to determine whether an enforcement investigation should be instituted"). According to the Report, the Division of Enforcement had a written policy in place for nearly 30 years to dispose of all documents from MUIs that were closed without becoming formal investigations. As a statistical sample, the Inspector General stated that between 1992 and 2010, approximately 45% of the MUIs were closed without becoming a formal investigation. The Inspector General stated that it did not find an improper motive for the policy, but said "there was a lack of clarity as to the rationale for the policy."
The Report also stated:
The OIG investigation also found that the SEC’s Enforcement staff destroyed documents related to closed MUIs that should have been preserved as federal records. These documents included anonymous correspondence and complaints, correspondence from the SEC requesting documents from companies in the course of a MUI, and correspondence to accompany companies’ document production responses.
However, the Inspector General was "not aware of a particular investigation that was hampered by the destruction of records for a MUI, although the OIG has not conducted an exhaustive audit or review … ."
Remarkably, despite the existence of the policy, when NARA (acting on information from Mr. Flynn) asked the SEC whether documents were being destroyed, the Commission did not make any inquiries into the issue and the Division of Enforcement responded by stating it was "not aware of any specific instances of the destruction of records from any [MUIs that were closed without a subsequent formal investigation], but we cannot say with certainty that no such documents have been destroyed over the past seventeen years."
The Inspector General's recommended that the Division of Enforcement:
• take appropriate steps to determine what federal records from closed MUIs are retrievable, and ensure that any such federal records are retained in the same manner that investigative records are retained pursuant to the current schedule with NARA;
• work with the SEC’s Office of Records Management Services and NARA to determine which MUI and investigative records are legally required to be retained;
• determine if there are additional federal records that, while not legally required to be retained, should be retained as a matter of Enforcement program policy; and
• review its guidance to ensure that all guidance is consistent with Enforcement’s federal record retention legal obligations.
According to an article on the Law360 website by Keith Goldberg entitled "Watchdog Slams SEC Over Doc Destruction," a spokesman for the SEC stated: "We are pleased that the inspector general found no evidence of any improper motive on the part of current or former SEC staff, and is not aware of any enforcement investigations that were hampered as a result of the policy that had been in place for 20 years. We will continue to work closely with NARA to resolve any outstanding issues." A redacted version of the Inspector General's Report, which is dated October 5, 2011 and was released on November 1, 2011, is available through the Law360 website here.
The Inspector General's Report was released less than a week after the SEC entered a cease-and-desist order against FINRA for altering documents (as discussed here), where the SEC asserted "the preparation, maintenance and furnishing of complete and accurate records are essential to the proper functioning of a national securities association as a self-regulatory organization."
The Inspector General's work on these issues is apparently not complete. The Report refers to another investigation, also based on allegations (which are redacted) from Mr. Flynn regarding a former SEC Director of Enforcement, which should result in another report from the Inspector General.
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